Red Money and Green Money

Red money takes risks in order to grow over the long-term, albeit with “volatility” (downs as well as ups). We call investments that only have upside volatility “too good to be true.” Better returning growth portfolios tend to do better than safe investments during the good times, but often will do poorly at times as well. A long-term investor who can withstand “volatility” will hopefully do better over time with a red money portfolio, but the long time horizon is often crucial.

Green money is money that you need tomorrow, or the next day, or maybe even in the next few years. In general, you don’t want to invest money needed in the short term in volatile investments because there is little recovery time. If the market declines significantly (there’s that darn “downside volatility” again), you might need to sell the investment before it has had long enough to recover because the money is intended for use in the short run. Therefore, we want to invest “green money” in things that don’t go down much, or at all. Bank certificates of deposit and money market funds are obvious candidates for green money, but other bonds and some annuity investments are also appropriate for this need. Some green money investments do have a risk of going down in principal at times, but hopefully they won’t have nearly as much risk as you have in the stock market or other “red money” investments.

This weekend I posted two portfolios to the RetirementWalkTV.com site. First, a growth portfolio is shown. This is generally how one of our Individual Retirement Account (IRA) portfolios was invested, at Fidelity, on the day of the blog post. We have rounded positions to ten (10) ten percent (10%) positions.

Many people think that they don’t know enough to “manage” their own portfolios. To that, I say, “can you divide by 10?” If so, I think you can do it. The portfolio is designed to be easy to follow. 10 x 10%. If one position gets out of whack (say, it appreciates to the point where is 10% of the portfolio), use that fund as a source of funds if you need to take a withdrawal. If you are adding new money to the portfolio, use the new money to buy whatever positions are lagging (i.e. have dropped, say, to a 9% weighting). This rebalancing process will automatically make you take profits in what is doing well and buy whatever is lagging. In time, that simple rebalancing mechanism alone can add a bit of return to the portfolio.

Had I asked an attorney, which I didn’t, he or she would tell me to put web visitors on notice that these holdings could change at any time and I won’t necessarily keep the web site up to date, especially instantaneously. The general idea, though, is that my “Money Monday” blog posts will address recent changes to the portfolio. Also, note that while there is real money invested in the Growth Portfolio model, as of today, there is no “real money” invested in the income model. In general, I tell folks to ignore what people say, but pay close attention to what they do. So, perhaps you should ignore the Income Model for now. Your choice. I just wanted to put the red money/green money idea out there.

In time, I am hoping to finally write a book that I’ve wanted to write for, literally, decades. It has been half-written at points. Investment Heresies will give readers a new way to think about investing. Just was I recommend separating “growth” and “income” portfolios – two accounts really are better than one – I also separate the financial services of investment research and portfolio transactions (portfolio custody). Big firms like Schwab, TD Ameritrade, and Fidelity have made it simple and inexpensive for investors to “manage” their own accounts. It is easy to open an account, get it invested, and move money around. If an broker or other financial professional does it for you, it will cost a small fortune (typically 1% to 1.75% of assets under management) and they will have dozens of stupid compliance rules to follow that prevent them from communicating effectively with you, run up liability for them, and generally force them to charge you a pretty hefty fee for something that you can easily do for yourself.

The hard part of investing is knowing which investments to incorporate in the portfolio. I won’t go into passive investing versus active management, but there are a couple ways to handle the research issue. The key is to separate out “research” from custody. RetirementWalkTV.com will tell you how I’ve got my money invested, and there is no cost to glean what you can from my thirty-plus years of experience.

How will we do? We’ll see. I’ve had good years and bad years. But at least the price is right!